In the last decade the courts have issued a series of judgments which have strengthened the pro-arbitration stance of the judiciary with regard to international commercial arbitration. However, the jurisprudence is more nuanced with respect to arbitrating disputes between two Indian parties.
M/s Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Ltd(1) is a reminder that public policy plays an important, albeit unclear, role with respect to Indian parties contracting between themselves. Indian nationals contracting between themselves must ensure that they do not derogate from Indian law when drawing up their agreements, lest they fall foul of Indian public policy.
Contentions in Addhar
In Addhar, the Bombay High Court considered an arbitration application filed under Section 11(6) of the Arbitration and Conciliation Act 1996 for the appointment of an arbitrator and a petition under Section 9 of the Arbitration and Conciliation Act 1996 for certain interim relief. The applicant and respondent were both Indian parties.
The arbitration agreement between the parties read as follows: "Clause 23: Arbitration in India or Singapore and English law to be [applied]."
The respondent opposed the application under Section 11 of the Arbitration and Conciliation Act 1996 on the grounds that the parties were governed by English law and the seat of arbitration was Singapore. The respondent contended that even though both parties were Indian, they could agree to have the seat of the arbitration in Singapore and apply English law.
The applicant contended that since both parties were incorporated in India and the arbitration agreement provided that the arbitration was to be held in India or Singapore and that English law was to apply, the arbitration could be held in India. The applicant further submitted that since both parties were from India, they could not derogate from Indian law. In support of this submission, the applicant relied on TDM Infrastructure Private Limited v UE Development India Private Limited.(2)
TDM Infrastructure and BALCO
With respect to domestic arbitration between two Indian parties, in TDM Infrastructure, the Supreme Court held as follows in its obiter dicta:
"Section 28 of the 1996 Act is imperative in character in view of Section 2(6) thereof, which excludes the same from those provisions which parties derogate from (if so provided by the Act). The intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is a part of the public policy of the country."
Thereafter, the Supreme Court in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc ('BALCO')(3) observed as follows:
"Section 28(1)(a) makes it clear that in an arbitration under Part I to which Section 2(1)(f) does not apply, there is no choice but for the Tribunal to apply the Indian substantive law applicable to the contract. This is clearly to ensure that two or more Indian parties do not circumvent the substantive Indian law, by resorting to arbitrations. This provision would have an overriding effect over any other contrary provision in such contract."
The observations in BALCO and TDM Infrastructure were made in the context of Section 28 of the Arbitration and Conciliation Act 1996, which requires that the seat of arbitration be India. For a domestic arbitration between two Indian parties, Section 28 requires the arbitral tribunal to decide the dispute in accordance with Indian law.
If broadly interpreted, the obiter dicta in TDM Infrastructure and BALCO indicate that Indian public policy prohibits Indian nationals from derogating from Indian law unless they are contracting with a foreign party, even if the dispute resolution mechanism provides for arbitration seated outside India. Further, arguably, Indian parties would derogate from Indian law – contrary to Section 28 of the Contract Act 1872 and Indian public policy – by choosing:
- a foreign seat (and thereby excluding the application of Part I of the Arbitration and Conciliation Act in a post-BALCO scenario);
- a foreign law as the proper law of the contract; or
- a foreign law as the governing law of the arbitration agreement.
However, if narrowly interpreted, these judgments merely reaffirm the principle that Indian parties cannot apply foreign law as the proper law of a contract in a domestic arbitration setting (ie, with a seat in India). However, it is still unclear whether two Indian parties can choose a foreign seat as the juridical seat of arbitration. If so, can they choose a foreign law as the proper law of contract or a foreign law as the governing law of the arbitration agreement?
Reliance Industries Limited v Union of India
In Reliance Industries Limited v Union of India,(4) a division bench of the Supreme Court held that where the parties – including two Indian parties – have chosen a seat outside India and have expressly chosen a foreign law to govern the arbitration agreement, unless they choose Indian substantive law to govern the contract, the Indian courts will have no jurisdiction to set aside the arbitral award.
In Reliance, Union of India entered into two production sharing contracts (both pre-BALCO agreements) – one with Reliance Industries Limited (a corporate body established in India) and the other with BG Exploration and Production India Limited (a corporate body established in the Cayman Islands) – for the exploration and production of petroleum. When disputes arose between the parties, Reliance invoked arbitration. An arbitral tribunal was constituted in July 2011. The arbitration agreement provided for a seat of arbitration in London and for English law to govern the arbitration agreement. The proper law of the contracts was Indian law.
The tribunal made a final partial award declaring that Union of India's claims in respect of royalties, cess, service tax and Comptroller and Auditor General (CAG) audit reports were arbitrable. Union of India appealed before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act 1996.
Reliance argued that Part I of the Arbitration and Conciliation Act had been implicitly excluded by the parties when they chose a seat in London and English law as the governing law. Union of India argued that the proper law of the contract was Indian law and the performance of the contracts was in India; therefore, no exclusion of Part I could be inferred. The Delhi High Court held for Union of India. Reliance appealed the Delhi High Court's decision.
The Supreme Court opined as follows:
"it is too late in the day to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause. This view of ours will find support from numerous judgements of this Court. Once the parties had consciously agreed that the juridical seat of the arbitration would be in London and that the arbitration agreement will be governed by the laws of England, it was no longer open to them to content that the provisions of Part I of the Arbitration Act would also be applicable to the arbitration agreement." (Emphasis added.)
The Supreme Court held that the law laid down in Videocon Industries Limited v Union of India(5) was relevant and binding, even though Videocon was decided in the context of an international commercial arbitration. Thus, the Supreme Court accorded similar treatment to a foreign-seated arbitration between two Indian parties and an international commercial arbitration between an Indian and foreign party. The Supreme Court held that Union of India's right to challenge an award rendered in the arbitral proceedings fell under the Arbitration Act 1996 of England and Wales.
Union of India argued that the application of Part I of the Arbitration and Conciliation Act could not be excluded, as the disputes related to royalties, cess, service tax and CAG audit reports were not arbitrable as they concerned violations of Indian public policy. Rejecting this argument, the Supreme Court held as follows:
"We fail to see any apparent or so patently obvious violation of Indian Laws in any of these claims. The basis for filing the petition under Section 34 is that the Appellants are bound to obey the Laws of the country. The appellants have nowhere claimed to be exempted from the Laws of India... It is not the case of the appellants that they are not bound by the Laws of India, relating to the performance of the contractual obligations under the PSCs." (Emphasis added.)
Arguably, the Supreme Court did not consider the parties' choice of a foreign seat of arbitration or foreign law as the governing law to be an "exemption from the laws of India".
Delhi Airport Metro Express Pvt Ltd v CAF India
A few months after the judgment in Reliance, the Delhi High Court had another opportunity to clarify whether two Indian parties can choose a foreign seat of arbitration in Delhi Airport Metro Express Pvt Ltd v CAF India.(6)
The plaintiff, an Indian entity, entered into a supply contract and a maintenance contract (both pre-BALCO agreements) with the second defendant, a Spanish entity. The maintenance contract contained an arbitration clause which provided for the proper law of the contract to be Indian law and the arbitration to take place in London, in accordance with the International Chamber of Commerce (ICC) Rules of Arbitration, Paris. Part I of the Arbitration and Conciliation Act was also expressly excluded by the parties in the arbitration agreement.
The second defendant executed an assignment agreement with the first defendant (an Indian entity) in relation to the maintenance contract, whereby the rights and obligations were transferred to the first defendant. Subsequently, disputes arose under the maintenance contract. The first defendant referred the disputes to arbitration under the ICC rules.
The plaintiff filed suit before the Delhi High Court, contending that because the plaintiff and first defendant were Indian entities, they could not enter into a contract with the seat of arbitration outside India. In other words, it was contended that two Indian parties involved in a domestic dispute cannot contractually agree to reject the Indian courts' jurisdiction with respect to a legal dispute arising between the parties in India. The plaintiff argued that if the first defendant were allowed to pursue arbitration in London, Part I of the Arbitration and Conciliation Act would be inapplicable; therefore, the first defendant would be circumventing Indian law.
It was also submitted that the arbitration agreement was contrary to Section 28 of the Contract Act, as it prevented the parties from exercising their legal rights under Indian law. The plaintiff also relied on TDM Infrastructure to support its claim that two Indian parties cannot fall within the ambit of international commercial arbitration and thus cannot exclude the applicability of Part I of the Arbitration and Conciliation Act. Videocon was distinguished, as it referred to an international commercial arbitration and was thus irrelevant to the case at hand, as it was argued that the two Indian parties could not be required to arbitrate in a foreign court, excluding Indian laws entirely.
The defendants argued that the arbitration agreement between the two Indian parties with a seat outside India was valid and thus arbitral proceedings were not against public policy. In support of these submissions, the defendants relied on Videocon, TDM Infrastructure and Reliance. It was also argued that the arbitration agreement specifying a foreign seat was not contrary to Section 28 of the Contract Act, as it fell within the explanation appended to the section. Finally, the defendants argued that as long as the agreement to arbitrate at the forum of their choice was made with open eyes, it was not a restraint of legal proceedings.
Unfortunately, the court side-stepped the consideration of this issue, holding that, further to the assignment agreement between the defendants, the second defendant was not completely discharged from its obligations and liabilities towards the plaintiff. Therefore, the maintenance agreement was held to be a tripartite agreement between the plaintiff and two defendants, and thus the arbitration agreement was not purely between the two Indian parties; therefore, the arbitral proceedings were in the nature of international commercial arbitration.
Rationale in Addhar
Ideally, the judicial precedents should have allowed for an analysis of the rationale behind Addhar. However, the judicial precedents have raised more questions than they have answered; and the judgment in Addhar only adds to the chequered jurisprudence on the subject.
The court's rationale in Addhar was as follows:
"8. It is not in dispute that both parties are from India. A perusal of clause 23 clearly indicates that intention of both parties is clear that the arbitration shall be either in India or in Singapore. If the seat of the arbitration would have be at Singapore, certainly English law will have to be applied. Supreme Court in case of TDM Infrastructure Private Limited (supra) has held that the intention of the legislature would be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country.
9. Insofar as submission of the learned counsel for the respondent that if such provision is interpreted in the manner in which it is canvassed by the learned counsel for the applicant, it would be in violation of section 28(1) (a) is concerned, since I am of the view that the arbitration has to be conducted in India, under section 28(1) (a), the arbitral tribunal will have to decide the disputes in accordance with the substantive law for the time being in force in India. In my view the said agreement which provides for arbitration in India thus does not violate section 28(1) (a) as canvassed by the learned counsel for the respondent.
12. Insofar as next submission of the learned counsel for the respondent in the alternative to the earlier submission that the said clause is workable on the ground that the clause referred to the seat of arbitration in Singapore and applicability of the English law to such proceedings are concerned, in my view since both the parties are Indian and cannot derogate the Indian law, this submission of the learned counsel has no substance and is rejected." (Emphasis added.)
Addhar may be relied on to argue that two Indian parties cannot choose a foreign seat of arbitration, as doing so would be a derogation from Indian law.
The contentions raised in Delhi Airport Metro Express Pvt Ltd demonstrate the uncertainty that persists on the issue of whether two Indian parties can choose a foreign seat and a foreign law to govern their arbitration agreements. Parties that seek to hold proceedings in India by relying on TDM Infrastructure, BALCO and Addhar, and those in favour of a foreign-seated arbitration on the basis of Reliance, can use this uncertainty to their advantage.
Further, even if two Indian parties successfully obtain a foreign arbitration award, it is still possible to delay enforcement proceedings in India by claiming that the award violates public policy.
Given the prevailing uncertainty, a conclusive finding on the subject from the Supreme Court would be welcome.
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